Wednesday, February 25, 2015

Foreclosures disproportionately hit minority neighborhoods across
the U.S. during the housing crisis. In Boston, over 80 percent of foreclosures
took place in just five of its 15 planning districts—Dorchester, East Boston,
Hyde Park, Mattapan, and Roxbury; nearly 75 percent of the residents in these
five districts are non-white, while the remainder of Boston is 70 percent white.
While we know foreclosures took place more frequently in these minority areas,
we know less about the paths that foreclosed properties followed and whether
these paths are similar across these hard-hit areas.

In a new working paper, I show that foreclosed
properties within the hardest-hit areas of Boston have quite different
trajectories, which leave some sections more disadvantaged than others in the
housing market recovery. Integrating
several data sources (foreclosure deeds, real estate sales transactions,
property tax records, crime and 911 reports, constituent service requests,
inspection violations, and building permits), I explore the following
questions:

Who buys foreclosures?

Do they maintain them?

Do these
characteristics affect the quality of the local neighborhood?

As in many other states, if a property owner in
Massachusetts defaults on his or her mortgage and is unable to stop foreclosure
proceedings (by paying the debt or negotiating new mortgage terms), the
property is sold at a public auction. About 15 percent of the residential foreclosures
(1-3 family units and condominiums) in Boston were purchased by investors
directly at auction, but most properties remained in the hands of the bank
following the auction. Eventually, the bank resells the property, but this can take
many months and even years. During this time, the property is often unoccupied,
which can lead to declining conditions of the property and the area around it.
A local ordinance has attempted to stymy this by requiring owners of
foreclosing properties, including lending institutions, to register with the
City. Once the property is purchased from the bank, the property may follow
many paths: owner-occupied or rented, fixed up, or left to decline.

The findings show that within Boston’s hard-hit planning
districts, not all foreclosed properties and their surrounding areas have experienced
the same trajectory in the wake of the housing crisis and recovery. Investors were more likely than owner-occupants to purchase foreclosed
properties in sections that had greater shares of blacks, even after accounting
for socioeconomic and housing characteristics of the areas and characteristics
of the foreclosed property. Indeed, only around one in five foreclosed
properties were purchased by owner-occupants in areas that were majority black,
but nearly one in three were purchased by owner-occupants in areas that were
less than 50 percent black. Moreover, individual investors were more likely
than both owner-occupants and larger investors to purchase foreclosed
properties in sections with greater shares of foreign-born residents.

When I examine how well new owners maintain their
properties, the types of buyers who tended to concentrate in areas with higher
shares of blacks were also less likely to maintain their properties. Foreclosed
properties purchased by investors registered as trusts—which include
non-owner-occupant family, realty, and land trusts and carry more legal risk
than corporations, but also maintain anonymity and do not pay state fees—were 2.5
times more likely than owner-occupants to have maintenance-related inspection
violations and service requests placed against them and were half as likely to
obtain permits to fix their properties. Other types of investors were also more
likely than owner-occupants to have maintenance-related inspection violations.

Lastly, areas where a higher percentage of foreclosures are
purchased by investors registered as trusts also have higher rates of
property-related issues in the local area. The lower quality of property
maintenance and greater rates of blight in particular sections of these
hard-hit areas can detract investment in the areas that need it most.
Nonetheless, the distribution of various types of foreclosure buyers are not
associated with local levels of crime and social disorder, such as loitering, but
areas with higher foreclosure rates had more crime and disorder.

Consistent with a long line of sociological research on
residential segregation and residential preferences, minority areas, and
certainly those with high foreclosure rates, crime, and disorder, are in the
least demand by all residents. Larger investors appear to be more willing or
financially able to take on these assets, but how they maintain their
properties has important implications for the future stability of these
neighborhoods. After all, visible blight serves as an important cue for
potential investors and households.

What can be done? Recognizing that owner-occupants may not
be the only possible solution for foreclosed properties, given the relatively
large stock over the last several years, policies can work to:

Create resources and opportunities
for smaller, local investors or owner-occupants to purchase and maintain
properties in areas struggling to recover.

Creative programs like the Landlord Entrepreneurship Affordability Program, which supports low- and
moderate-income families in purchasing, rehabilitating, and serving as an
owner-occupant landlord in small-scale rental properties, are what truly
distressed areas need.

Thursday, February 19, 2015

Many media outlets and blogs (including our own), have reported on the results of the Housing Vacancy Survey (HVS) for
the fourth quarter of 2014, which showed the US homeownership rate had dropped
to its lowest point in fully 20 years. But
the fourth quarter HVS contained another surprising reading—one that could
be even more noteworthy than the continued fall in the homeownership rate. The HVS
is one of very few sources of short-term estimates of household growth – an
important gauge of housing demand. And
the surprise here was that HVS data show household growth going through the
roof in the fourth quarter of 2014, with year-over-year growth in excess of 1.6
million households. This comes after household growth had long been stalled
out, averaging less than 600,000 per quarter for much of the previous five years
(Figure 1).

The concern and attention surrounding this number breeds
from the thick cloud of uncertainty behind trends in household growth. Survey
data from the Census Bureau such as the HVS, ACS, and CPS/ASEC give different and
sometimes conflicting measures of household growth year-to-year, each with wide
margins of error, which makes it difficult for analysts to call out trends with
much confidence. Amidst this lack of clarity
is a widely held anticipation, or possibly hope, that household growth, having
been ‘pent-up’
after such a long period of weakness, is primed to rebound strongly and this Q4
number from HVS might signal an inflection point.

One possible explanation for such an abrupt change in the
rate of household growth in the fourth quarter HVS would be some change in how
the survey is conducted or weighted that caused a discontinuity in the series.
But the folks at HVS report that there were no structural or methodological
changes to the dataset that would have been behind the sharp rise.

Without any methodological justification for the sudden
jump, another factor may be some degree of sampling variation that produced an
abnormally high estimate for the quarter. HVS has noted that quarter to quarter
variability within the survey has increased and in many respects, this Q4
number is simply a prime example of how erratic quarterly data in the HVS can
be and why we prefer not to make much of any one quarter and opt instead to look
at rolling averages or other smoothed versions of this data to get a sense of
recent trends. But even averaged over
the previous four quarters, Q4 still pulls the annual household growth reading
for 2014 up significantly, to 789,000, representing a significant increase from
the 524,000 annual growth reported for 2013, although still well below the long-run
pace of 1.2 million per year that the Joint Center estimates is the baseline
amount to expect given current levels of adult population growth and changes.

Alternatively, this fourth quarter increase could be a
sign that the HVS is simply catching up to reality with its household counts after
underestimating household growth over the past several years, In fact, prior
to the 4th quarter results, the primary concern with HVS estimates was that
they were overly low (see previous blogs on the topic here
and here),
in showing continued weakness in new household formation even as the economic
recovery continued to gain steam.

Indeed, there are a variety of other market indicators that
would suggest that household growth has been increasing at a modest pace in
recent years and more than has been suggested in HVS quarterly releases prior
to Q4. Most notably, employment growth
has been ratcheting up over the last three years, from 2.3 million in 2012 to 2.4
million in 2013 and 3.1 million last year. Importantly, these gains have
also been felt among young adults who are so important to household formation,
with the unemployment rate of those age 25-34 dropping from 8.9 to 5.9 percent over
this period. The slow rise in housing
starts from 550,000 in 2009 to 1.0 million last year, at the same time that
vacancy rates have declined, also suggests that household growth has been
picking up steadily over this period.

In short, given the nature of survey data, we are not
putting too much trust in the accuracy of this one quarter’s estimate of household
growth reaching a 1.6 million annual pace, but do believe household formation has
been gaining momentum, which bodes well for a stronger housing recovery in
2015. But there are also headwinds. Indeed, rising rents, declining rental
affordability, and rising student debt levels remain barriers to household
formation for many. Given the lack of
clarity, certainly there is good reason to keep an even closer eye on this important
measure over the course of the coming year.

Tuesday, February 17, 2015

As baby boomers
age and die, adult population growth will begin to fall off sharply in the
coming decade. Though this decline will have a dampening effect on household
growth, it will occur over several decades and much may be offset by the millennial
generation beginning households of their own. Even when baby boomers do release
housing back into the market, it may not be suitable for, or desired by, younger
occupants, so despite slower adult population growth in the future, demand for
newly built housing will persist.

According to recent Census Bureau population projections, adult
population growth will start turning sharply downward later this decade (Figure 1). After increasing by close to
2.5 million each year for more than a decade, growth in the population age 20
and older will steadily decline to about 1.5 million per year by 2050, a 40
percent drop.

Source: 2014 Census Bureau population projections

Despite their improving
life expectancies, the oldest baby boomers will soon turn 70, and begin to die
off in ever-greater numbers. Today,
there are about 2.6 million deaths every year, but this number will rise to
over 4 million a year by 2050. Meanwhile, births are also projected to increase
over the same time period, but only by about 500,000. Consequently, the rate of natural increase
(births minus deaths) is projected to fall dramatically (Figure 2). Today, population
growth is about evenly distributed between migration from abroad and natural
increase. Under the new Census Bureau
assumptions, natural increase will fall to half the level of growth from
immigration by 2035, and further decline to about one third by 2050.

Source: Census Bureau 2014 population projections

Adult population
growth has generally been the primary driver of household growth in the U.S.
For most years since 1990, there have been roughly 2.5 million more adults over
the age of 20 compared to the year before. This growth came from the aging of those born in the U.S. 20+ years ago,
as well as immigration during the past two and a half decades. On average, almost half of all persons over
the age of 20 head an independent household. Therefore, the adult population growth we’ve seen over the past 25 years
alone would account for annual household growth of about 1.2 million.

Actual annual
household growth was either above or below 1.2 million because of shifts in the
age structure of the adult population, and because of changes in age-specific
rates of household formation (headship) linked to social, demographic, and
economic changes. These latter changes
include trends in marital status and fertility, minority composition and
nativity, and employment and income, to name the most important.

Age structure
changes have had a positive effect on household growth as aging baby boomers
inflated successive age groups that have higher headship rates. For example,
the oldest boomers were age 35-44 in 1990, 45-54 in 2000 and 55-64 in
2010. As they aged, the share heading an
independent household increased from 53.4 percent in 1990, 56.1 percent in
2000, and 58.5 percent in 2010. On the
other hand, recent social, demographic, and economic trends have generally had
a negative effect on age-specific rates of household formation, particularly in
the younger age groups. Higher minority shares
and delayed marriage have had a negative effect on headship
rates, as has the Great Recession’s impact on employment and income. It is important to note, however, that not
only have the effects of population aging and the broad demographic trends
affecting headship rates tended to cancel each other out, but each has
been small compared to that of adult population growth, numbering in the low
hundreds of thousands annual net household growth or decline (Figure 3).

Projected declining
adult population growth because of increasing deaths will have several effects
on housing markets, mentioned below. But it will not have an immediate and
proportional impact on household growth for a variety of reasons. First, many initial baby boomer deaths will
occur to married couples, leaving the surviving spouse to continue to head a
household. Many deaths will also occur
to people who do not head a household, but rather live in a household headed by
children or other relatives, or in institutional settings (assisted living or
nursing facilities). Declining household
growth because of increased household dissolutions among the elderly will be
spread out over many decades. Furthermore, when dying baby boomers do begin to have a larger impact on
total net household growth, aging millennials could cause the changing age
structure effect to be more positive, similar to what baby boomers exerted as
they passed into middle age, offsetting the effects of declining adult
population growth. It is also entirely
possible that a fuller recovery from the Great Recession will reverse the fall
in headship rates, further offsetting any effect of slower adult population
growth.

When we reach a
point where baby boomers are releasing housing in greater numbers back to the
market, however, we still cannot assume that it will proportionately reduce the
demand for newly built housing to accommodate young adults. Many homes vacated
by aging seniors will not be in demand by tomorrow’s young adults, being in the
wrong part of the country or otherwise unsuitable (age restricted
communities, for example). Some will be
simply too expensive. Some “affordable” vacated
homes in desirable locations will be torn down and replaced by larger
and more energy efficient / amenity rich houses targeted to older buyers. Many houses will sit on the market for long
periods of time before sellers are willing to recognize that they are
overpriced. Some homes in declining communities
will become abandoned.

In short, while the
housing market does somewhat resemble a game of musical chairs, with successive
age groups “moving up” as their incomes and families grow, and older households
exiting, this process can be inefficient for young adults moving into units vacated
by baby boomers because of the reasons discussed. In addition, the majority of baby boom household dissolutions will not take place until after
2030. It will not be until 2060 or later
that the last of the baby boomers, born in the early 1960s, will die. Between
now and 2030, new construction will still be needed to meet the housing demand from
the large cohorts under the age of 30 that are currently in the pipeline, and which
will be further inflated by any future immigration. Where that housing will be
located and what it will look like is far less certain.

Thursday, February 5, 2015

The Census Bureau recently released its 2014 Q4 Housing Vacancy Survey
(HVS) data, giving us a complete look at the boom and bust in homeownership
rates over the last 20 years. The HVS’ reported homeownership rate, though far from perfect, remains the most up-to-date and cited statistic on
homeownership in the U.S., and thus an important barometer of the housing
status of American households. One advantage of the HVS is its long time frame,
going back to 1965 at the annual and regional level, which helps to put recent
trends in homeownership into a historical context. Figure 1 shows that the national homeownership rate rose steadily
through the late 1960s and 1970s, from 63 to 65.6 percent, before declining
slightly in the early 1980s. After a decade of stagnation, the rate rose
rapidly from 1994 to 2004, from 64 to a record high of 69 percent. Since then,
however, the national homeownership rate has declined almost fully back to its
1994 level.

Source: U.S. Census Bureau, Housing Vacancy Survey

The roller-coaster ride of the national homeownership rate
from the last 20 years, while dramatic in its own right, only tells a small
part of the homeownership story. Another advantage of the HVS data is reporting
on homeownership rates for subsets of households by race/ethnicity and age,
which add important texture to this story. Homeownership rates by race and
ethnicity, for example, have generally followed the same up-and-down trend as
the national rate, although no identified racial or ethnic group has given back
all their gains. Indeed, when measured by the difference in their homeownership
rates relative to 1994, only blacks are close to their former level (Figure 2). Households in the ‘other’
category (mostly comprised of Asians, Pacific Islanders, and multi-race
householders), which grew their share of homeowners by 12 percentage points
during the boom, remain fully 7 percentage points up today.

Notes: Hispanic includes all races. All other races includes multiracial.

Source: U.S. Census Bureau, Housing Vacancy Survey.

The reason the national homeownership rate has declined all
the way back to its 1994 level, even when no individual racial or ethnic group
has done so, is because of the simultaneous shift in the race/Hispanic origin composition
of households in the U.S., which has increased the share of all households that
are headed by a minority. Due to the lower homeownership rates of minorities,
relative to non-Hispanic Whites, this shift automatically lowers the
homeownership rates of the nation, independent of any changes in minority-specific
homeownership rate.

The second set of data from the HVS to shed more light on
homeownership trends are the changes in rates by age of householder. Similar to
the breakouts of homeownership rates by race and ethnicity, most of the age
groups identified share the same rise and fall trend over the last 20 years,
although householders ages 65 and older did not decline appreciably following
the mid-2000s boom (Figure 3). The
youngest households, those under age 35, gained the most in their homeownership
rate during the boom, but have since declined to one-and-a-half percentage
points below their pre-boom rate. Middle-age groups, meanwhile, have seen their
homeownership rates fall nearly five percentage points below their mid-90s
level, with 35 to 44 year olds experiencing a full ten percentage point swing
in the last ten years. These dramatic declines are greater than the overall
decline in homeownership because of the shifting age composition of households,
which have skewed older over the last twenty years as the baby boomers
progressed into higher ownership middle and early retirement ages, being
replaced in the 25 to 44 age group by the smaller and more racially diverse
Generation X cohorts with lower ownership rates. The low levels among younger
cohorts, however, do suggest that the national homeownership rate is only back
to its mid-90s level because of sustained homeownership by older households,
and that among those in their prime working years the actual homeownership rate
is indeed well below so-called ‘normal’ levels.

Source: U.S. Census Bureau, Housing Vacancy Survey.

A quick glance at these data may raise some concerns about
the future of homeownership, especially for younger households and minorities
who will account for large shares of households going forward. Yet caution
should be exercised in extrapolating these trends forward. For one thing, the HVS data often shows
unexplainable jumps in quarterly rates and counts of households, which are
somewhat muted by these annual averages. Second, recently moderating house
prices and a move to relax lending restrictions, along with the reduction in FHA mortgage insurance premiums, should give home buying a boost. Third,
most people, and especially young adults, remain in favor of homeownership, despite the risks exposed during the recession
and foreclosure crisis. For these reasons, few analysts expect homeownership rates to fall much further. If it were to
happen, however, the story would change from one of returning to a pre-boom norm
of about 64 percent, to entering a new era of low homeownership rates unlike
anything we have seen in the last 50 years.

Thursday, January 29, 2015

In the aftermath of the Great Recession, the U.S.
home improvement industry has fared much better than the broader housing
market, according to our new report. Emerging Trends in the Remodeling Market. While residential construction is
many years away from a full recovery, the home improvement industry could post
record-level spending in 2015.
A number of factors have contributed to the strengthening remodeling market: following the housing bust, many households that might have traded up to more desirable homes decided instead to improve their current homes; federal and state stimulus programs encouraged energy-efficient upgrades; and many rental property owners, responding to a surge in demand, reinvested in their properties to attract new tenants.

Additionally, with the economy strengthening and house prices recovering, spending on discretionary home improvements (remodels and additions that improve homeowner lifestyles but which can be deferred when economic conditions are uncertain) rose by almost $6 billion between 2011 and 2013, the first increase since 2007.

Improvement spending, however, has not been evenly distributed across the country. Homeowners in the nation’s top 50 remodeling markets accounted for a disproportionately large share—nearly 60 percent—of overall improvement spending. Thanks primarily to their higher incomes and home values, owners in metro areas spent 50 percent more on improvement projects on average than their non-metro counterparts in 2013 (see interactive map).

The remodeling industry also faces a radically different landscape than before the recession. “After years of declining revenue and high failure rates, the home improvement industry is, to some extent, reinventing itself,” says Kermit Baker, director of our Remodeling Futures Program. “The industry is finding new ways to address emerging growth markets and rebuild its workforce to better serve an evolving customer base.”

Looking ahead, there are several opportunities for further growth in the remodeling industry. The retiring baby boom generation is already boosting demand for accessibility improvements that will enable owners to remain safely in their homes as they age. Additionally, growing environmental awareness holds out promise that sustainable home improvements and energy-efficient upgrades will continue to be among the fastest growing market segments.

Millennials, however, are the key to the remodeling outlook. “The millennials’ increasing presence in the rental market has already helped lift improvement spending in that segment,” says Chris Herbert, managing director of the Joint Center. “It’s only a matter of time before this generation becomes more active in the housing market, supporting stronger growth in home improvement spending for decades to come.”

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Drawing from the ongoing research and analysis of the Harvard Joint Center for Housing Studies, Housing Perspectives provides timely insight into current trends and key issues in housing. We dig deeper into the housing headlines to discuss critical issues and trends in housing, community development, global urbanism, and sustainability. Posts are written by staff of the Joint Center, drawing from their wide-ranging knowledge and experience studying housing. We hope you will follow Housing Perspectives, and we welcome your comments.

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